"In March 1999, a small number of Californians discovered a new world called Norrath, populated by an exotic but industrious people. About 12,000 people call this place their permanent home, although some 60,000 are present there at any given time. The nominal hourly wage is about USD 3.42 per hour, and the labors of the people produce a GNP per capita somewhere between that of Russia and Bulgaria. A unit of Norrath's currency is traded on exchange markets at USD 0.0107, higher than the Yen and the Lira. The economy is characterized by extreme inequality, yet life there is quite attractive to many. The population is growing rapidly, swollen each each day by hundreds of emigres from various places around the globe, but especially the United States. Perhaps the most interesting thing about the new world is its location. Norrath is a virtual world that exists entirely on 40 computers in San Diego. Unlike many internet ventures, virtual worlds are making money -- with annual revenues expected to top USD 1.5 billion by 2004 -- and if network effects are as powerful here as they have been with other internet innovations, virtual worlds may soon become the primary venue for all online activity." -(Abstract from Virtual Worlds by Edward Castronova)

The first paper published on the phenomenon of virtual economies was published in 2001 by Edward Castronova (the abstract from that paper is quoted above).

Edward Castronova was at that time a welfare economist (a saddeningly unpopular profession), a professor at Fullerton in California and living alone (his wife worked in another city). Needless to say, he was bored and dissatisfied. To pass the time Castronova started playing Everquest. Castronova soon noticed the games buslting internal economy. Virtual goods where generated by the players various in game activities (most often killing of animals/creatures that roamed Norrath's landscape) and traded between players in virtual marketplaces. Things didn't get interesting until Castronova noticed player auctions. People who tired of the game were selling off their characters on sites like ebay, people also sold items and virtual currency (in this case, "platinum pieces"). Everquest items had real-world value.

People where paying cold hard cash for ones and zeros.

Castronova gathered information from 616 auctions, noting how much each item was sold for in US dollars. After calculating the exchange rates, he discovered that and EverQuest platinum piece was worth about 1 US cent. At that time higher than the Japaneseyen or the Italianlira (these exchange rates are no longer accurate, but the idea remains the same). With this figure in mind, Castronova went back to crunching numbers to figure out how quickly the Everquest economy was growing. EverQuest players where generating incomes every second they were in the game, killing monsters, skinning animals, using their "skills" to produce goods and services. He found that the average player for an hour in game, produces about 319 platinum pieces, which meant that the hourly wage for playing EverQuest was about $3.42 (higher than the minimum wage in most countries.) In 2001 the GDP for EverQuest was about $2,266 U.S. per capita.

EverQuest was the 77th richest country in the world, and it didn't even exist.

Castronova soon published his research in a paper entitled Virtual Worlds: A First Hand Account of Market and Society on the Cyberian Frontier "I thought maybe seventy-five people would read it," he recalls, "and that'd be great." (The Walrus). Instead of 75 people reading the paper, thousands did. People where discussing it on blogs and forums, politicians and economists where clamoring to read it, and it soon became the most downloaded paper from the Social Science Research Network (where it was published).

Whats The Big Deal?

To most people, this is worthy of a sidways glance and a shoulder shrug. To economists, this is an exciting new era.

The problem with studing economics is that there is no controlled study, there is no test group, there is no perfect market. Economists hypothesize about imaginary markets where everyone is rational and informed and starts off equal. The problem is that people are not always rational, they do not always act in their best economic interest, and all things are not equal. Some people are born very rich, some very poor, some get ivy leauge educations, some get high school educations. Karl Marx argues that capitol is the problem with most markets, Adam Smith argues that people preferfree markets and the ability to excell. But there is no way of difinitively testing these theories.

The beautiful thing about these virtual economies, is that everyone does start off equal. Everyone starts off with a level 1 character, no money, no skills and no items but the clothes on your back. EverQuest and games like it present a true meritocracy, and look to economists how a lab full of equipment and a petri dish full of cells must look to a geneticist.

Adam Smith Wins Again

As it turns out, people do prefer unequal outcomes. Only a few dedicated players attain the highest level characters, the rarest items, and fancy castles in which to keep it all. Most people remain relatively poor as far as the game is concerned.

A few game developers have offered games with a more socialist bend, where you can't amass more property than anyone else. But these games where quickly and roundly rejected as boring and unplayable. Gamers don't want to have the same virtual toys as everyone else. That is half the fun.

Players have no problem tolerating this huge split between the rich and the poor because they know that everyone started out equal, and if they dedicate enough time and energy, and have enough skills, they too can reach that high level and buy a castle of their very own.

Nothing Is Perfect

The game developers role does not end when it puts out the game. They cannot just leave it to the "free market" and hope everyone lives happily ever after. Game developers make more money the more people who play the game. They sell the software, they charge the monthly subscription fees. So it is important for them to keep the game interesting and exciting and worth playing to players old and new. And the one thing players want the most is a fair game, or at least the illusion of a fair game.

Developers face such issues as controlling in-game inflation rates, deciding the "fair" prices that the NPC mercants are going to buy items for, deciding how many rare items to make. If a spool of thread costs two gold, and a tailor can turn it into a shirt worth twenty gold, is that a profit margin that is fair or makes sense? Is everyone going to become a tailor to exploit this, and hence ruin the economy of the game?

Developers not only have to regulate their software, but they also have to regulate the players. If the rich, high level players buy up all the basic goods, driving the price up so high that new players cannot afford to play is that fair? The programmers at Ultima Online addressed this problem by "dropping" objects in places where low-level characters could easily find them, and buying the generlly useless goods like animal skins that these low-level characters produced. Ultima online morphed from an entirely free market state, to a state which duelly operated on free-market princibles and what was basically a welfare program. Players decided that it was "fair" and kept playing. Most games now implement a system like this one.

Game developers also have to decide if they are going to allow players to use gold, items and characters that where bought off of online auctions. The problem with these things was that anyone with a credit-card now could buy that castle that everyone else had to work for. It destroyed the meritocracy, which was very highly valued by the gamers. Despite this, there was a high demand for these things. Many people did not want to waste the time it would take to kill 1000 bunnies in order to reach level two. There is also the allure of earning cash for doing something you enjoy. Even the most stoic, hard-core gamers are lured occassionally by the possible thousands of dollars of profits if they sold their characters and virtual goods. So, do developers let the players be, buying and selling as they choose, or do they outlaw pre-leveled characters and bought items and preserve the meritocracy? Do they cater to the professionals who play the game in their spare time and do not want to spend three days leveling, and the young and the rich who just want to be the most bad-ass without having to work for it (the american dream). Or do they cater to their core audience, the dedicated gamer who is going to buy the expansion packs and is going to keep paying that monthly fee for years?

Labor Migration and How Virtual and Earth Economies Interact

It is a basic economic idea that time is worth something, and that there are two kinds of time: work time, during which you spend your time amassing weath, and play time, during which you spend your time amassing satsifaction. Everyone divides their time differently depending on their needs and desires.

As I write this, on www.PlayerAuctions.com there are auctions such as " 60 Warrior Tauren - Tons of Blue Gear! - 292 Tailoring - Rank 3: Seargeant - Complete Graphical Profile - $399.00" and " 99$: WOW POWER LEVELING 50-60 ALL SERVERS - $99.00". People are turning what would have been considered play time and making it into profitable work time. There is a noticable and nearly quantifiable migration in the labor force from Earth economies to virtual ones. This is just one of the interesting interactions between the two markets.